Michael Noonan described the leaking of the document as 'disappointing'. Photo: Getty ImagesTaoiseach Enda Kenny greeting German leader Angela Merkel on a visit to Berlin earlier this week. Photo: ReutersOlli Rehn

THE IRISH Government is planning to increase VAT to 23pc as part of a trade-off with bailout masters to avoid income tax hikes, it has been confirmed.

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VAT hike a trade-off to avoid income tax increase - Kenny

Independent.ie

THE IRISH Government is planning to increase VAT to 23pc as part of a trade-off with bailout masters to avoid income tax hikes, it has been confirmed.

Taoiseach Enda Kenny was forced to divulge key planks of a looming €3.8bn austerity budget after an embarrassing leak from German politicians with unprecedented access to draft proposals.

But there are fears the 2pc VAT rise will spark an exodus of shoppers to north of the border where the rate is a much keener 20pc.

However, it is understood that a shift from direct to indirect tax in 2012 would be consistent with recommendations from the OECD and in line with other European countries.

The proposal was included in a report compiled in Dublin and furnished to all 27 EU states by the European Commission, and subsequently inspected by the Bundestag in Berlin, as part of the terms of Ireland's stringent €67.5bn bailout deal.

Mr Kenny said the VAT hike had been agreed in negotiations with the European Central Bank (ECB), the Commission and the International Monetary Fund (IMF) in return for a freeze on income tax rates but insisted it was only a proposal.

"I'm not in the blame game here," the Taoiseach said.

"I regret that these things which are speculative and are not signed off on should be the source of discussion in other quarters."

Finance Minister Michael Noonan confirmed the VAT rise, from 21pc to 23pc, is designed to raise €670m but it will also strike fear in to the retail trade, particularly along the border.

"I'm doing that because indirect taxes have less impact on jobs. We have to raise taxes and on this occasion I don't want to raise income tax because it destroys jobs."

Under the original bailout agreement, almost one year old, Ireland had been committed to another income tax hike to bring in an extra €250m budget.

Sinn Fein president Gerry Adams repeated his party's demands for the Taoiseach to make a statement on the leaks.

"This is another example of how the sovereignty of this state has been handed over," Mr Adams said.

Micheal Martin, leader of opposition party Fianna Fail, said the disclosures to foreign politicians are unprecedented.

"For the public outside it defies belief and demands explanation from the Government and demands clarification as to what information is going to be put before 40 members of the German parliament in relation to details of the forthcoming budget," he said.

Mr Noonan said he had already confirmed the VAT rise, along with carbon tax, increasing by €5 per tonne, earning €108m, and the flat rate €100 household charge to bring in €160m when discussing the medium term fiscal report at the start of the month.

"It is important that the Irish parliament and the public would be fully informed," he said.

"I put the information out there. So unless I put it up in lights I couldn't be any more blunt about it, because if I was any more blunt about it I'd be accused of announcing budgetary measures ahead of the budget."

The Government is planning €2.2bn in spending cuts and €1.6bn extra in taxes as well as €700m savings from social welfare.

The leaks were all the more embarrassing as they occurred as the Taoiseach held talks with Chancellor Angela Merkel.

The document was written by Irish Government officials but it had not been signed off by Mr Noonan or Central Bank Governor Patrick Honohan.

A spokesman for Olli Rehn, European Commissioner for Economic and Monetary Affairs, confirmed officials in Brussels sent the Budget 2012 document to finance ministries in all 27 EU states.

"On behalf of the Commission the leaks are regrettable," said Amadeu Altafaj Tardio.

"But we have a legal obligation to share the information that we receive from the authorities in Dublin with the member states. This is actually our mandate.

"Ireland sees the same information from the Troika about Greece, for example," he said.

German politicians sitting on a budget committee in the lower house of parliament were given access to the document under strict rules reinforced by the country's Constitutional Court. The Bundestag rather than the government in Berlin decides whether the country is willing to keep funding bailout packages.

The Commission insisted it did not forward the unsigned, draft budget document to the German parliament.